Adviser or Not?

Posted By Paul

So it was about 12 years ago when I decided to try to find a financial adviser. I thought it would be a good way to get an early start on my finances.

I went with a financial adviser that was recommended by the head of accounting at the company I worked for at the time.

Here is a quick summary of the various actions I took based on the suggestions of my adviser and how good the advice was in my opinion:

1) He suggested that I start a Roth IRA. Overall I thought this was a good decision. I like the Roth IRA and I'm glad I started one early.

2) He suggested I buy a house. This was a great decision. I certainly would have purchased a house at some point but his suggestion to buy a house earlier than later was a great decision for me.

3) He suggested I invest in a Variable Universal Life policy. I was intrigued by this concept, and even started one for a time, but after researching it further and watching the returns, I decided that this wasn't something I was interested in and stopped the policy and cashed it out.

4) He suggested various mutual funds for my IRA. This generally worked fine as my IRA got returns that were decent (though not spectacular).

5) He suggested some low-risk funds for my "emergency fund". This also generally worked fine as my emergency fund grew at a conservative and tolerable level.

The reason I'm writing this article now is that as I got older and got more interested in finances, here are some things I decided I didn't like:

-The funds that he had suggested had high expense ratios.

-The funds that he suggested often had loads involved with them.

If you're not familiar with those terms then read my earlier article:

A Few Quick Tips On Mutual Funds

So I recently decided that I wanted to manage my money more directly. Towards that end I did the following:

-I moved my Roth IRA and Rollover IRA into Vanguard (I like their no-load funds and low expense ratios)

-I moved my emergency fund into a discount brokerage account (specifically eTrade).

I don't think my adviser was very happy about this, since I was essentially taking away the portion of the fund fees that were going to him. I decided that the money he was making off of me was essentially his cost for his advice. Ten years ago I was willing to pay for that advice but now I felt knowledgeable enough that I wanted to try it myself. So why continue to pay for advice that I no longer really needed?

It wasn't that the funds my advisor put me in were bad, in fact they were perfectly fine, but I decided that I wanted to find out if I could do as well (or maybe even better) on my own.

I figure that I can try this for a year or two and if I end up doing terrible then I can always call up my adviser again. I plan on simply buying some funds and holding, I certainly don't plan on crazy day trading or anything like that so I suspect that I'll do just fine, and hopefully enjoy the process and learn a lot.

So having gone down this road with my adviser would I recommend it to someone? I'd say yes under certain specific conditions.

For example, let's say that you DON'T KNOW MUCH about saving and investing and DON'T WANT to learn about it, then an adviser might be a good idea. However financial adviser plus no interest in learning about it yourself is a potentially dangerous situation. If you effectively give your adviser carte blanche to handle your money then they could easily steer your in directions that are somewhat lucrative for you, but extremely lucrative for them. If you want to not be involved in handling your own money, then I would not settle for anything less than an adviser that you trust completely (like a close relative or family friend if possible).

Also, if you think you might be interested in handling your own investing and savings at some point in the future but don't feel comfortable jumping in on your own, then an adviser might be worth it for a little while as a way to learn about things.

The way I see it, having a financial adviser got me focused on savings and investing very early and the money I saved (and made off of the savings) more than made up for the costs of the adviser. However, the very fact that you are reading this blog suggests that you are interested in learning about investing to the point where I would think your probably don't need an adviser. With the resources available on the Internet (like Frugalize!) it's easy to learn the basics of investing and as long as you don't do anything too crazy at the beginning (like sinking ALL of your money into one stock), then you'll probably be fine.

Instead of an adviser, I would suggest trying to find people to discuss your finances with like friends, family and coworkers. I know that money is often considered a taboo subject but it's not like you have to compare bank statements or swap paychecks to talk about saving and investing. I have a small group of people that I discuss finances with and I find their non-biased, first hand information to be incredibly useful.

If you do decide you want to get an adviser then I have some basic advice for you. First, make sure that you get one that is willing to clearly discuss how they make their money. If they ever try to make it sound like they're working for you for free, then be VERY suspicious. Second, don't think that having and adviser means that you shouldn't be VERY involved in your finances. An adviser should only provide you with ideas. The final choice of what you do with your money is ALWAYS yours. Don't blindly follow the advice of your adviser. Ask questions, bring up ideas of your own, track your returns. You are paying for their advice, make sure it's worth it to you.